U.S. oil-via-rail deliveries surge 48%, but growth may taper off

Oil deliveries by rail in the United States shot up 48% in the first half of the year compared to the same period last year, echoing similar growth in Canada, but it may be tough to repeat such blistering growth in the future.

U.S. oil producers shipped 1.37 million barrels per day (bpd) of oil and related products via rail in the first half compared to 972,000 bpd during the first six months of 2012, according to the U.S. Energy Department’s statistical arm, the Energy Information Administration Of these, more than half was crude oil alone.

Statistics Canada data shows an estimated 175,000 bpd of Canadian oil was transported through railroads in April, the most recent figures on the growing segment. The data shows railcars delivering Canadian fuel and crude petroleum products doubled to 14,217 in April 2013, compared to 7,194 in April 2012.

The trend of rail shipments of oil has come under intense scrutiny after a tragic accident involving oil-laden trains in Lac-Mégantic, Que., but beyond tougher safety regulations, analysts don’t expect companies to stay away from rail.

“I don’t think it will lead to a slowdown in the willingness of producers to use crude-by-rail,” said Chris Cox, analyst at AltaCorp Capital. “The only real impact is the general debate over pipelines.”

Total combined U.S. and Canadian production of 11.26 million bpd, suggests just under 8% of North American oil production was transported by railroads during the first half. While the growth will continue, at a slower pace, rail shipments may taper off as rail economics deteriorate and new pipeline capacity comes on line.

More U.S. Bakken shale oil and Canadian crude moving to market by rail has helped narrow the discount on spot prices of those blends with pricier international benchmarks. Bloomberg data shows Western Canada Select discount to West Texas Intermediate had halved from $33 at the start of the year to $16.15 by Wednesday. Bakken crude has narrowed to $5 of WTI.

“The narrower spread reduces the incentive to ship oil to coastal refineries,” said the EIA.

“We believe it is more economic to ship by pipeline right now, so we will likely see some of these volumes move back to the pipelines,” said AltaCorp’s Mr. Cox, adding that there has to be “happy medium” between the differentials for the pipeline and rail.

Meanwhile, the pipeline industry is fighting back as well. Apart from the controversial Keystone XL pipeline, 37 other pipeline projects are planned or underway in the United States, which would help ease the congestion.

“We see rail continuing to grow through the end of the decade, but at a slower rate than in the past years,” said Harold York, Houston-based analyst at energy consultant Wood Mackenzie. “You have a huge surge in rail loading and offloading capacity being utilized, but we do see pipelines projects coming on that will absorb that production growth.”

Still, rail shipments are unlikely to be halted even if all the major pipelines get the green light.

“As tight oil continues to revolutionise North America rail shipment is not going to end,” Mr. Cox said. “Supply costs are evolving and producers would want to have certain portion committed to have that flexibility. Cenovus, for example, wants long term to have roughly 10% of its production committed on rail to allow for the flexibility. That’s probably a good gauge of where the industry is set to go.”

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